It is said that cash flow is the lifeblood of any business. We have all experienced the joys and woes of cash flow ups and downs.
Most businesses multi-bank. Although this is a prudent approach to being less dependent on a single financier, it also poses unintended consequences.
The downside is hidden in higher fee structures and finance facilities which are not necessarily purpose-fit for the needs and requirements of operations.
To move closer to an optimised finance structure for the business, we need to develop a keen understanding of the following elements:
Understand what type of finance is needed as well as the required amount
Know that financiers assess a finance request against three things:
The business plan – how the funding will be applied
The skillset and experience of the business owner – will the business owner be able to implement the business plan
The availability of collateral – to decrease the risk of the financier
Where to go if finance is needed?
The first “go to” place is the commercial bank where you have the best relationship and track record
The other alternative is to identify a business finance facilitator with access to multiple financiers (commercial banks and other funders). SFP ENTERPRISE has a finance facilitator on the Subject Matter Expert panel.
There are multiple reasons why financiers might decline a finance request. Having insight into the reasons can help us to be better prepared and realistic with respect to our expectations.
The following list includes the most prevalent reasons for decline:
The request for finance is not within the mandate of the financier
The business might have a poor credit record (missed payments, defaults, judgements)
The business might have cash flow limitations, i.e., the financier is not convinced that the business will be able to service the loan repayments (revenue is inconsistent or there is a high level of existing debt)
The lack of collateral or security for the loan
The business plan is weak
The financial statements do not provide sufficient assurance
The industry in which the business operates poses a considerable risk
If these are the elements to be mindful of, the next question to answer is how to improve the chances to secure business funding.
Strengthen the credit profile of the business by consistently paying all business obligations on time or early
Improve cash flow and the financial health of the business by speeding up receivables while controlling payables
Prepare a convincing financial plan and projections
Secure collateral by building assets that hold tangible value and are easily accepted by financiers such as cash, accounts receivable, equipment, or real estate
Choose the right financier and loan type
I trust that this article will help you to navigate the maze of uncertainties when your business has a need for external funding. There are billions of Rands available to fund businesses in South Africa. You can use the leverage of “other people’s money” to grow your business.
Do you need any of the following services?
Business advisory support / business growth support / business planning
Business finance
Banking facility audit
Family business advisory services
Buying or selling of a business / business valuation
Speak to your SFP Financial Adviser who will introduce you to the designated SUBJECT MATTER EXPERT on the SFP ENTERPRISE panel who would be able to address your specific business need or requirement.
Visit our website at: www.sfpadvice.co.za.